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Why your business loan application got rejected

Wondering why a lender didn't want to do business with you? We take you through what might have gone wrong with your application.

Businesses need finance for a range of reasons, from cash flow problems and debt consolidation to expansion and purchasing new stock and equipment. Whatever reason you're applying for a business loan, a lender needs to be sure you're able to repay the loan that you're applying for.

Why was my business loan application rejected?

This is a question you might be directing at your lender, but one you might not be getting an answer to. Understanding why your business loan was rejected can help you when you next apply for finance as you'll be able to improve your application for the next lender.

Here are some common reasons that businesses get turned down for credit:

  • Bad credit

While there are bad credit business loans available, negative marks on your credit file can usually cause you to be rejected from receiving a traditional business loan. If you’re unable to honour the financial commitments you already have, lenders are unlikely to approve your application for an additional loan. Make sure you check the eligibility criteria set out by the business lender or check with the lender directly to see if your credit history will be a problem.

Lenders usually check the credit file of the director when approving a business for a loan, but they can also check the business's credit file for bankruptcy information and other financial details. You can order a free copy of your personal credit report once every 12 months within 90 days of being rejected for credit. This way you’re able to check for possible errors or see where you can reorganise your finances to improve your credit rating.

  • Cash flow issues

All businesses have cash flow problems from time to time, but if your business spends too much time in the red it can mean your loan might not be approved. If lenders see that there’s no money for day-to-day operations, it shows that you’re not in a position to make repayments on a loan.

It's also important to note that good cash flow doesn’t automatically qualify you for a loan. The amount of time you’ve been in business is a major consideration. Banks and alternative lenders have different minimum requirements, so it’s a good idea to research loan options to find out which ones your business is eligible for.

  • Insufficient collateral

Banks usually require security for business loans, so not holding a personal or business asset such as property, a vehicle, retained income or another investment can see your application rejected.

Before submitting your business loan application, do research on what can be considered collateral. Using the assets you already own as security is a good way to bolster your application and eventually grow your business.

There are also a growing number of alternative lenders offering unsecured business loans.

  • Applying with the wrong lender

Sometimes the reason your loan is rejected is that you are simply with the wrong lender. Institutions have varying lending criteria, so while a traditional bank might not grant you a loan, you might qualify for a loan from an online provider or another alternative lender.

However, if your application was rejected, you can represent a higher risk when you apply elsewhere. While certain providers may be more lenient than others, you might have to settle for higher rates and fees due to the recent rejected application being listed on your file.

Business loans are usually rejected because businesses don’t meet a lender’s criteria. Other than shopping around for loan criteria that you do meet, the best thing you can do is make sure that you’re in a position to make repayments and that you have a positive credit profile.

Picture: Shutterstock

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